SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2000
or
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-26994
ADVENT SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-2901952
(IRS Employer Identification Number)
301 Brannan Street, San Francisco, California 94107
(Address of principal executive offices and zip code)
(415) 543-7696
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of
October 31, 2000 was 30,377,186.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income
and Comprehensive Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------------------------------------------------------------------------------------
(in thousands) (unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term marketable securities $ 139,099 $ 119,126
Accounts receivable, net 29,281 25,452
Prepaid expenses and other 3,973 3,789
Deferred income taxes 3,209 3,209
------------- --------------
Total current assets 175,562 151,576
------------- --------------
Fixed assets, net 21,910 16,661
Other assets, net 26,879 22,951
------------- --------------
Total assets $ 224,351 $ 191,188
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 947 $ 1,185
Accrued liabilities 7,832 7,962
Deferred revenues 18,758 17,230
Income taxes payable 8,566 3,328
------------- --------------
Total current liabilities 36,103 29,705
------------- --------------
Long-term liabilities:
Other liabilities 1,144 824
------------- --------------
Total liabilities 37,247 30,529
------------- --------------
Stockholders' equity:
Common stock 303 292
Additional paid-in capital 140,703 130,960
Retained earnings 46,214 29,382
Cumulative other comprehensive income (loss) (116) 25
------------- --------------
Total stockholders' equity 187,104 160,659
------------- --------------
------------- --------------
Total liabilities and stockholders' equity $ 224,351 $ 191,188
============= ==============
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License and development fees $ 16,572 $ 12,851 $ 45,050 $ 33,568
Maintenance and other recurring 13,181 9,830 36,402 27,658
Professional services and other 4,362 4,339 12,949 10,236
---------------- ---------------- ---------------- ----------------
Net revenues 34,115 27,020 94,401 71,462
---------------- ---------------- ---------------- ----------------
Cost of revenues:
License and development fees 1,243 817 3,701 2,445
Maintenance and other recurring 3,444 2,698 9,813 7,427
Professional services and other 1,423 1,471 4,224 3,948
---------------- ---------------- ---------------- ----------------
Total cost of revenues 6,110 4,986 17,738 13,820
---------------- ---------------- ---------------- ----------------
Gross margin 28,005 22,034 76,663 57,642
---------------- ---------------- ---------------- ----------------
Operating expenses:
Sales and marketing 10,489 8,373 30,222 23,189
Product development 5,414 4,344 15,899 12,210
General and administrative 2,778 2,557 8,689 7,279
Amortization of intangibles 382 383 1,146 1,150
---------------- ---------------- ---------------- ----------------
Total operating expenses 19,063 15,657 55,956 43,828
---------------- ---------------- ---------------- ----------------
Income from operations 8,942 6,377 20,707 13,814
Interest and other income, net 1,879 1,235 4,843 2,046
---------------- ---------------- ---------------- ----------------
Income before income taxes 10,821 7,612 25,550 15,860
Provision for income taxes 3,679 2,588 8,687 5,393
---------------- ---------------- ---------------- ----------------
Net income $ 7,142 $ 5,024 $ 16,863 $ 10,467
================ ================ ================ ================
Other comprehensive income, net of tax
Foreign currency translations
adjustment (55) (2) (141) 28
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 7,087 $ 5,022 $ 16,722 $ 10,495
================ ================ ================ ================
NET INCOME PER SHARE DATA
Diluted
Net income per share $ 0.21 $ 0.16 $ 0.49 $ 0.36
Shares used in per share calculations 34,540 32,296 34,174 29,414
Basic
Net income per share $ 0.24 $ 0.17 $ 0.56 $ 0.40
Shares used in per share calculations 30,192 28,894 29,847 26,342
---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ADVENT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
(in thousands) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,863 $ 10,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash stock compensation 99 -
Loss on disposal of asset 19 -
Depreciation and amortization 4,576 3,071
Provision for doubtful accounts 2,004 907
Deferred rent 321 214
Cash provided by (used in) operating assets and liabilities:
Accounts receivable (5,945) (5,823)
Prepaid and other current assets (189) (1,905)
Accounts payable (223) (493)
Accrued liabilities (56) 1,429
Deferred revenues 1,568 480
Income taxes payable 5,193 1,885
----------- -----------
Net cash provided by operating activities 24,230 10,232
----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (8,687) (4,977)
Deposits and other (5,122) (6,027)
----------- -----------
Net cash used in investing activities (13,809) (11,004)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 9,624 74,744
----------- -----------
Net cash provided by financing activities 9,624 74,744
----------- -----------
Effect of exchange rate changes on cash and short-term
marketable securities (72) 33
----------- -----------
Net increase in cash and short-term marketable securities 19,973 74,005
Cash and short-term marketable securities at beginning of period 119,126 43,284
----------- -----------
Cash and short-term marketable securities at end of period $ 139,099 $ 117,289
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 3,389 $ 2,816
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
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ADVENT SOFTWARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Advent Software, Inc. and its wholly-owned subsidiaries. We have eliminated all
significant intercompany balances and transactions.
We prepared the condensed consolidated financial statements in accordance
with the rules and regulations of the Securities and Exchange Commission ("SEC")
applicable to interim financial information. Certain information and footnote
disclosures included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted in these interim
statements pursuant to such SEC rules and regulations. We recommend that these
interim financial statements be read in conjunction with the audited financial
statements and related notes included in our 1999 Report on Form 10-K filed with
the SEC. Interim results are not necessarily indicative of the results to be
expected for the full year.
In our opinion, the condensed consolidated financial statements include all
adjustments necessary to present fairly the financial position and results of
operations for each interim period shown.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS
138. SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities, and is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We are in the process of determining whether this
pronouncement will have a material impact on our financial position and results
of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In addition, the SEC released, in October 2000, interpretative
guidance on SAB 101 in the form of frequently asked questions and responses
thereto. SAB 101 and the frequently asked questions and responses provide
guidance for revenue recognition under certain circumstances. We are currently
evaluating the impact of SAB 101 on our financial statements and related
disclosures, but do not expect that such impact, if any, will be material. The
accounting and disclosures prescribed by SAB 101 will be effective for our
fiscal year ending December 31, 2000.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN44),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25" ("Interpretation"). The Interpretation is
intended to clarify certain problems that have arisen in practice since the
issuance of APB 25. The Interpretation provides guidance, some of which is a
significant departure from current industry practice. The Interpretation
generally provides for prospective application for grants or modifications to
existing stock options or awards made after June 30, 2000. However, for certain
transactions the guidance is effective after December 15, 1998 and January 12,
2000. The adoption of this pronouncement did not have an effect on the current
or historical financial statements, but may impact our future accounting
regarding stock option transactions.
6
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3. NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except for per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Net income $ 7,142 $ 5,024 $ 16,863 $ 10,467
Reconciliation of shares used in basic and diluted
per share calculations
Diluted
Weighted average common shares outstanding 30,192 28,894 29,847 26,342
Dilutive effect of stock options 4,348 3,402 4,327 3,072
--------------- ------------ ---------------- ----------------
Shares used in diluted net income per share calculation 34,540 32,296 34,174 29,414
=============== ============ ================ ================
Diluted net income per share $ 0.21 $ 0.16 $ 0.49 $ 0.36
=============== ============ ================ ================
Basic
Weighted average common shares outstanding 30,192 28,894 29,847 26,342
--------------- ------------ ---------------- ----------------
Shares used in basic net income per share calculation 30,192 28,894 29,847 26,342
=============== ============ ================ ================
Basic net income per share $ 0.24 $ 0.17 $ 0.56 $ 0.40
=============== ============ ================ ================
Weighted average options outstanding at September 30,
2000 and 1999 not included in computation of diluted EPS
because the exercise price was greater than the average
market price - - 129 556
Price of options not used in diluted EPS calculation $ - $ - $52.50 - 56.875 $21.375 - 21.542
--------------- ------------ ---------------- ----------------
</TABLE>
4. STOCK SPLIT
Our Board of Directors approved a two-for-one split of our Common Stock in
February 2000. The stock split was effected as a stock dividend. Stockholders of
record as of the close of business on February 28, 2000 were issued a
certificate representing one additional Common Share for each share of Common
Stock held on the record date. These certificates were distributed on March 13,
2000. This stock split increased the number of shares of Common Stock
outstanding from approximately 14.8 million shares to approximately 29.6 million
shares.
We have adjusted all shares and per share data in this Form 10-Q to reflect
the stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential" or "continue" or the negative
of such terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Risk Factors and Forward Looking
Statements," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels or activity, performance or achievements expressed or implied by
such forward-looking statements.
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Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this Form 10-Q or to conform such statements to actual results.
RESULTS OF OPERATIONS
REVENUES
Our net revenues for the third quarter increased 26% to $34.1 million,
compared with net revenues of $27.0 million for the same period in 1999. Net
revenues for the nine months ended September 30, 2000 increased 32% to $94.4
million, compared with net revenues of $71.5 million in the same period last
year. Net revenues for the third quarter of 2000 do not include revenues from
our semi-annual Fall User Conference while revenues for the third quarter of
1999 include revenues from the conference. The Fall User Conference this year
will be held in the fourth quarter. Our net revenues are made up of three
components: license and development fees, maintenance and other recurring as
well as professional services and other and all components increased from the
prior year. No individual client contributed 10% or more in revenues for the
three and nine months ended September 30, 2000.
LICENSE REVENUE AND DEVELOPMENT FEES. License revenue and development fees
for the third quarter of 2000 increased 29% to $16.6 million compared with
license revenue and development fees of $12.9 million for the third quarter of
1999. License revenue and development fees for the nine months ended September
30, 2000 increased 34% to $45.1 million, compared with $33.6 million from the
same period last year. The increases in both periods were primarily due to
increased demand for the Advent Office suite and Geneva product.
MAINTENANCE AND OTHER RECURRING REVENUE. Maintenance and other recurring
revenue for the third quarter of 2000 increased 34% to $13.2 million, compared
with maintenance and other recurring revenue of $9.8 million for the third
quarter of 1999. Maintenance and other recurring revenue for the nine months
ended September 30, 2000 increased 32% to $36.4 million, compared with
maintenance and other recurring revenue of $27.7 million for the same period
last year. The increases were due primarily to a larger client base requiring
maintenance services and multi-product sales to our existing installed base. In
addition, increased demand for implementation management support and
consolidated securities information and data contributed to the increase in
maintenance and other recurring revenues.
PROFESSIONAL SERVICES AND OTHER REVENUE. Professional services and other
revenue for the third quarter of 2000 were $4.4 million compared with
professional services and other revenue of $4.3 million for the third quarter of
1999. Excluding the impact of the Fall User Conference in the third quarter
1999, professional services and other revenue for the third quarter of 2000
increased 25%. Professional services and other revenue for the nine months ended
September 30, 2000 increased 27% to $12.9 million, compared with $10.2 million
for the same period last year. Excluding the impact of the Fall User Conference
in the third quarter 1999, professional services and other revenue for the nine
months ended September 30, 2000 increased 38%. The increases for both periods
were primarily due to higher product sales, which increased demand for our
consulting services.
COST OF REVENUES
Our cost of revenues for the third quarter of 2000 increased 23% to $6.1
million, compared with cost of revenues of $5.0 million for the third quarter of
1999. Cost of revenues for the nine months ended September 30, 2000 increased
28% to $17.7 million, compared with $13.8 million for the same period last year.
Cost of revenues as a percentage of net revenues was 18% for the three months
ended September 30, 2000 and 1999. Cost of revenues as a percentage of net
revenues was 19% for the nine months ended September 30, 2000. Our cost of
revenues is made up of three components, cost of license and development fees,
cost of maintenance and other recurring as well as cost of professional services
and other.
COST OF LICENSE AND DEVELOPMENT FEES. Cost of license and development fees
increased 52% to $1.2 million in the third quarter of 2000 from $817,000 in the
third quarter of 1999. Cost of license and development fees increased 51% to
$3.7 million in the nine months ended September 30, 2000, compared with $2.4
million in the same period last year. The increase in cost of license and
development fees is directly related to the increase in license and development
fees revenue. Cost of license and development fees as a percentage of the
related revenues increased to 8% from 6% for the third quarter of 2000 compared
to the same period in 1999. Cost of license and development fees as a percentage
of the related revenues increased
8
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to 8% from 7% in the nine months ended September 30, 2000, compared with the
same period last year, respectively. The increases were primarily a result of
changes in the mix of license and development fees revenues for both periods.
COST OF MAINTENANCE AND OTHER RECURRING REVENUES. Cost of maintenance and
other recurring revenues increased 28% to $3.4 million for the third quarter of
2000 from $2.7 million for the third quarter of 1999. Cost of maintenance and
other recurring revenues increased 32% to $9.8 million for the nine months ended
September 30, 2000, compared with $7.4 million for the same period last year.
The increases were primarily due to increased personnel needed to support a
larger customer base, as well as an increase in implementation management
support needed for complex installations. Cost of maintenance and other
recurring revenues as a percentage of the related revenues decreased to 26% for
the third quarter 2000, compared with 27% in the same period last year. Cost of
maintenance and other recurring revenues as a percentage of the related revenues
remained relatively constant at 27% for the nine months ended September 30, 2000
and 1999.
COST OF PROFESSIONAL SERVICES AND OTHER REVENUE. Cost of professional
services and other revenue for the third quarter of 2000 were $1.4 million,
compared with $1.5 million for the same period in 1999 and increased to $4.2
million for the nine months ended September 30, 2000 compared with $3.9 million
for the same period last year. Excluding the impact of the Fall User Conference
in the third quarter 1999, cost of professional services and other revenue
increased 11% and 12% for the three and nine months ended September 30, 2000,
respectively. The increases were primarily due to increased personnel necessary
to provide services to a larger customer base. Cost of professional services and
other revenue as a percentage of the related revenues decreased to 33% in the
third quarter of 2000 from 34% in the third quarter of 1999. Cost of
professional services and other revenue as a percentage of the related revenues
decreased to 33% for the nine months ended September 30, 2000, compared with 39%
in the same period last year. Excluding the impact of the Fall 1999 User
Conference, the decrease in cost of professional services and other revenue as a
percentage of related revenues for the three and nine months ended September 30,
2000 would be more in line with the decreases for the nine month period. The
decreases were primarily due to more efficient delivery of services, such as
web-based training sessions, as well as improved project management resulting in
better utilization of personnel.
OPERATING EXPENSES
SALES AND MARKETING. Our sales and marketing expenses for the third quarter
of 2000 increased 25% to $10.5 million, compared with $8.4 million for the third
quarter of 1999. Sales and marketing expenses for the nine months ended
September 30, 2000 increased 30% to $30.2 million, compared with $23.2 million
in the same period last year. The increase in expense for the three and nine
months ended September 30, 2000 was primarily due to an increase in the number
of sales and marketing personnel and increased marketing initiatives towards our
Advent Office suite and our Internet initiatives. Sales and marketing expenses
as a percentage of net revenues remained relatively stable at 31% for the third
quarter of 2000 and 1999. Sales and marketing expenses as a percentage of net
revenues remained relatively stable at 32% for the nine months ended September
30, 2000 and 1999.
PRODUCT DEVELOPMENT. Our product development expenses for the third quarter
of 2000 increased 25% to $5.4 million, compared with product development
expenses of $4.3 million for the third quarter of 1999. Product development
expenses for the nine months ended September 30, 2000 increased 30% to $15.9
million, compared with $12.2 million in the same period last year. Product
development expenses increased primarily due to a growth in personnel as we
increased our product development efforts for existing product enhancements and
new product introductions. Product development expenses as a percentage of net
revenues remained relatively stable at 16% for the third quarter 2000 compared
with the third quarter 1999. Product development expenses as a percentage of net
revenues remained relatively stable at 17% for the nine months ended September
30, 2000 and 1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses for the
third quarter of 2000 increased 9% to $2.8 million, compared with general and
administrative expenses of $2.6 million for the third quarter of 1999. The
expense increased 19% to $8.7 million for the nine months ended September 30,
2000, compared with $7.3 million in the same period last year. The increase was
due to additional staffing to support our growth. General and administrative
expenses as a percentage of net revenues decreased to 8% in the third quarter of
2000, compared with 9% in the third quarter of 1999. General and administrative
expenses as a percentage of net revenues decreased to 9% in the nine months
ended September 30, 2000, compared with 10% in the same period last year. The
decrease was primarily due to lower outside professional service costs. To a
lesser extent, the decreases were also attributed to economies of scale.
9
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INTEREST AND OTHER INCOME, NET. Interest and other income, net was $1.9
million in the third quarter of 2000, compared with $1.2 million in the third
quarter of 1999, reflecting an increase of $644,000. Interest and other income,
net was $4.8 million in the nine months ended September 30, 2000, compared with
$2.0 million in the same period last year, reflecting an increase of $2.8
million. The increase was primarily due to higher interest rates and increased
amount of funds available for investment from operations and the proceeds of our
secondary offering in June 1999.
PROVISION FOR INCOME TAXES. For the three and nine months ended September
30, 2000 we recorded a tax provision of $3.7 million and $8.7 million,
respectively, based on our pretax income using an effective tax rate of 34%,
which is our anticipated effective tax rate for the fiscal year 2000. The actual
effective tax rate for the entire fiscal year could vary substantially depending
on actual results achieved. We had an effective tax rate of 34% for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term marketable securities at
September 30, 2000 were $139.1 million, increasing by $20.0 million from $119.1
million at December 31, 1999. The increase was due to $24.2 million provided by
operating activities and $9.6 million provided by financing activities offset by
$13.8 million used in investing activities.
The net cash of $24.2 million provided from operating activities for the
nine months ended September 30, 2000 was primarily due to net income and
increases in deferred revenues and income taxes payable offset by increases in
accounts receivable. Financing activities provided $9.6 million for the nine
months ended September 30, 2000, primarily due to proceeds from exercises of
common stock options and the employee stock purchase plan. Net cash used in
investing activities of $13.8 million for the nine months ended September 30,
2000 was related primarily to the acquisition of fixed assets for the buildout
of our newly leased New York office space as well as prepayments to new
strategic partners to further bring new products and services to our clients.
At September 30, 2000, we had $139.5 million in working capital. We
currently have no significant capital commitments other than commitments under
our operating leases. We believe that our available sources of funds and
anticipated cash flows from operations will be adequate to finance current
operations and anticipated capital expenditures through at least fiscal 2001.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO MAINTAIN
OUR EXISTING GROWTH RATES.
Licenses into multi-user networked environments have increased both in
individual size and number, and the timing and size of individual license
transactions are becoming increasingly important factors in quarterly operating
results. The sales cycles for transactions of this size are often lengthy and
unpredictable. We may not be successful in closing large license transactions
such as these on a timely basis or at all. Accordingly, if future revenues from
large site licenses constitute a material portion of our net revenues, the
timing of such licenses could cause additional variability in our quarterly
operating results. We typically ship our software products shortly after receipt
of a signed license agreement and initial payment and, consequently, software
product backlog at the beginning of any quarter typically represents only a
small portion of that quarter's expected revenues. Our expense levels are based
in significant part on our expectations of future revenues and therefore are
relatively fixed in the short term. Due to the fixed nature of these expenses
combined with the relatively high gross margin historically achieved by us on
products and services, an unanticipated decline in net revenues in any
particular quarter is likely to disproportionately adversely affect operating
results.
We have generally realized lower revenues from license fees in the first
quarter of the year than in the last quarter of the prior year. We believe that
this has been due primarily to the concentration by some clients of larger
capital purchases in the fourth quarter of the calendar year and their lower
purchasing activity during the subsequent first quarter. We believe our annual
incentive compensation plans, which tend to produce increased year-end sales
activity, compound this factor. Furthermore, we have often recognized a
substantial portion of each quarter's license revenues in the last month, weeks
or even days of that quarter. As a result, the magnitude of quarterly
fluctuations in revenue or earnings may not be evident until late in or after
the close of a particular quarter.
10
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Because of the above factors, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of future performance.
Our stock price has fluctuated significantly since our initial public
offering in November 1995. Like many companies in the technology and emerging
growth sector, our stock price may be subject to wide fluctuations, particularly
during times of high market volatility. If net revenues or earnings in any
quarter fail to meet the investment community's expectations, our stock price is
likely to decline. In addition, our stock price may be affected by broader
market trends unrelated to our performance.
OUR SALES CYCLE IS LONG AND WE HAVE LIMITED ABILITY TO FORECAST THE TIMING AND
AMOUNT OF SPECIFIC SALES.
Because the purchase of our software products often requires significant,
executive-level investment and systems architecture decisions by prospective
customers, we must generally engage in a relatively lengthy sales effort. These
transactions may be delayed during the customer acceptance process because we
must provide a significant level of education to prospective customers regarding
the use and benefit of our products. As a result, the sales cycle associated
with the purchase of our software products is typically between two and twelve
months depending upon the size of the client, though it can be considerably
longer, and is subject to a number of significant risks over which we have
little or no control, including customers' budgeting constraints and internal
acceptance procedures. As a result of a lengthy and unpredictable sales cycle,
we have limited ability to forecast the timing and amount of specific sales. The
timing of large individual sales is especially difficult to forecast. As a
result, there can be no assurance that we will be successful in closing large
license transactions on a timely basis or at all. Because our expenses are
generally relatively fixed in the near term, any shortfall from anticipated
revenues could result in significant variations in our operating results from
quarter to quarter.
The implementation of our solutions involves a significant commitment of
resources by customers and by us over an extended period of time. Also, the size
and complexity of any particular implementation project can cause delays in the
sales cycle that precedes it. Any such delays could seriously harm our business.
WE DEPEND HEAVILY ON OUR PRODUCT, AXYS.
In 1999, 1998 and 1997, we derived a substantial majority of our net
revenues from the licensing of Axys and related products and services. In
addition, many of our other products, such as Moxy, Qube and various data
interfaces were designed to operate with Axys to provide an integrated solution.
As a result, we believe that a majority of our net revenues, for the foreseeable
future, will depend upon continued market acceptance of Axys, enhancements or
upgrades to Axys and related products and services.
WE ARE CONTINUING TO EXPAND OUR INTERNET INITIATIVE.
To take advantage of the Internet, we are continuing to expand an Internet
initiative under which we are developing services, both announced and
unannounced, to bring Internet-based products and services to clients. The first
of these services, Rex, was launched during the second quarter of 1997. The
second service, Advent Browser Reporting, was launched in the third quarter of
1998. During 2000 we have introduced a number of new products and services which
take advantage of Internet technology, including Advent TrustedNetwork, My
Advent, E-Actions (through our HubData subsidiary), Internet enabled
enhancements to Gifts for Windows (through our MicroEdge subsidiary) and Advent
Outsource, a service that delivers Advent Office functionality through an
application service provider (ASP) model. As we develop new products and
services under our Internet initiative, we have and will continue to enter into
development agreements with information providers, clients or other companies in
order to accelerate the delivery of new products and services. We may not be
successful in marketing our Internet services or in developing other Internet
services. Our failure to do so could seriously harm our business.
WE FACE RISKS RELATED TO OUR NEW BUSINESS AREAS.
We have expanded in recent periods into a number of new business areas to
foster long-term growth including international operations, strategic alliances
and our Internet initiatives. These areas are relatively new to our product
development and sales personnel. New business areas require significant
management time and resources prior to generating significant revenues and may
divert management from our core business. There is no assurance that we will
compete effectively or will generate significant revenues in these areas. The
success of our Internet initiatives, in particular, are difficult to predict
because they represent new areas of business for our entire industry.
Additionally, to help manage our growth we will need to continually improve our
operational, financial, management and information systems and controls.
11
<PAGE>
WE EXPECT OUR GROSS AND OPERATING MARGINS MAY FLUCTUATE OVER TIME.
We also expect that our gross and operating margins may fluctuate from
period to period as we continue to introduce new recurring revenue products,
expand our professional services organization and associated revenue, continue
to hire additional personnel and increase other expenses to support our
business. We plan our expense levels based primarily on forecasted revenue
levels. Because these expenses are relatively fixed in the short term, a
fluctuation in revenue could lead to operating results differing from
expectations.
WE MUST CONTINUE TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS.
The market for our products is characterized by rapid technological change,
changes in customer demands and evolving industry standards. As a result, our
future success will continue to depend upon our ability to develop new products
that address the future needs of our target markets and to respond to these
changing standards and practices. Delays in the commencement of commercial
shipments of new products or enhancements may result in client dissatisfaction
and delay or loss of product revenues. In addition, our ability to develop new
products and product enhancements is dependent upon the products of other
software vendors, including system software vendors, such as Microsoft
Corporation, database vendors and development tool vendors. If the products of
these vendors have design defects or flaws, or if these products are
unexpectedly delayed in their introduction, our business could be seriously
harmed.
WE DEPEND UPON FINANCIAL MARKETS.
The target clients for our products include a range of organizations that
manage investment portfolios, including investment advisors, brokerage firms,
banks and hedge funds. In addition, we target corporations, public funds,
universities and non-profit organizations, which also manage investment
portfolios and have many of the same needs. The success of many of our clients
is intrinsically linked to the health of the financial markets. We believe that
demand for our products could be disproportionately affected by fluctuations,
disruptions, instability or downturns in the financial markets which may cause
clients and potential clients to exit the industry or delay, cancel or reduce
any planned expenditures for investment management systems and software
products. Any resulting decline in demand for our products could have a material
adverse effect on our business and results of operations.
GENERAL ECONOMIC CONDITIONS MAY REDUCE OUR REVENUES.
We believe that the market for large management software systems may be
negatively impacted by a number of factors, including:
* reductions in capital expenditures by large customers;
* poor performance of major financial markets, and
* increasing competition.
The above factors may, in turn, give rise to a number of market trends that may
slow revenue growth across the industry, including:
* longer sales cycles;
* deferral or delay of information technology projects and generally reduced
expenditures for software and related services; and
* increased price competition.
Although we do not believe these factors have impacted our revenues to
date, the continued presence of these factors in the market for large management
software systems could adversely affect our business and results of operations.
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IF OUR RELATIONSHIP WITH INTERACTIVE DATA CORPORATION IS TERMINATED, OUR
BUSINESS MAY BE HARMED.
Many of our clients use our proprietary interface to electronically
retrieve pricing and other data from Interactive Data Corporation (Interactive
Data). Interactive Data pays us a commission based on their revenues from
providing this data to our clients. Our software products have been customized
to be compatible with their system and this software would need to be redesigned
if their services were unavailable for any reason. Termination of our agreement
with Interactive Data would require at least two years notice by either us or
them, or 90 days in the case of material breach. If our relationship with
Interactive Data were terminated or their services were unavailable to our
clients for any reason, replacing these services could be costly and time
consuming.
WE FACE INTENSE COMPETITION.
The market for investment management software is intensely competitive and
highly fragmented, subject to rapid change and highly sensitive to new product
introductions and marketing efforts by industry participants. Our competitors
include providers of software and related services as well as Application
Service Providers of timeshare services.
Our competitors vary in size, scope of services offered and platforms
supported. In addition, we compete indirectly with existing and potential
clients, many of whom develop their own software for their particular needs and
therefore may be reluctant to license software products offered by independent
vendors like us. Many of our competitors have longer operating histories and
greater financial, technical, sales and marketing resources than we do. We
cannot guarantee that we will be able to compete successfully against current
and future competitors or that competitive pressures will not result in price
reductions, reduced operating margins and loss of market share, any one of which
could seriously harm our business.
WE FACE CHALLENGES IN EXPANDING OUR INTERNATIONAL OPERATIONS.
We market and sell our products in the United States and, to a lesser
extent, internationally. We have established a subsidiary located in Australia
to market and license our products in Australia. In addition, during 1999 we
entered into a distributor relationship with Advent Europe, an independent
distributor of our products in Europe. In order to further expand our
international operations, we would need to continue to establish additional
facilities, acquire other businesses or enter into additional distribution
relationships in other parts of the world. The expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources. We cannot be
certain that our investments in establishing facilities in other countries will
produce desired levels of revenue. We currently have limited experience in
developing localized versions of our products and marketing and distributing our
products internationally. In addition, international operations are subject to
other inherent risks, including:
* The impact of recessions in economies outside the United States;
* Greater difficulty in accounts receivable collection and longer collection
periods;
* Unexpected changes in regulatory requirements;
* Difficulties in successfully adapting our products to the language, regulatory
and technology standards of other countries;
* Difficulties and costs of staffing and managing foreign operations;
* Reduced protection for intellectual property rights in some countries;
* Potentially adverse tax consequences; and
* Political and economic instability.
Our international revenues are generally denominated in U.S. dollars, with
the exception of our subsidiary, Advent Australia Pty., Ltd. (Advent Australia).
The revenues, expenses, assets and liabilities of our subsidiary, Advent
Australia, are primarily
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denominated in Australian dollars. We do not currently engage in currency
hedging activities. Although exposure to currency fluctuations to date has been
insignificant, future fluctuations in currency exchange rates may adversely
affect revenues from international sales and the U.S. dollar value of Advent
Australia's revenues, expenses, assets and liabilities.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS
OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS THAT COULD SERIOUSLY HARM OUR
BUSINESS.
Our products may contain undetected software errors or failures when first
introduced or as new versions are released. Despite testing by us and by current
and potential customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or a delay in market
acceptance, which could seriously harm our business.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY BE SUBJECT TO
INCREASED COMPETITION THAT COULD SERIOUSLY HARM OUR BUSINESS.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. We cannot assure you that we will develop proprietary products or
technologies that are patentable, that any patent, if issued, would provide us
with any competitive advantages or would not be challenged by third parties, or
that the patents of others will not adversely affect our ability to do business.
Litigation may be necessary to protect our proprietary technology. This
litigation may be time-consuming and expensive. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect proprietary rights
to as great an extent as do the laws of the United States. We cannot assure you
that our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology, duplicate our
products or design around any patent that may be issued to us or other
intellectual property rights of ours.
WE FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES.
We may acquire or make investments in complementary companies, products or
technologies. In addition, we continually evaluate the performance of all our
products and product lines and may sell or discontinue current products or
product lines. If we buy a company, we could have difficulty in integrating that
company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in assimilating the acquired technology
or products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt, write-off software development costs or
other assets, incur severance liabilities, amortize expenses related to goodwill
and other intangible assets or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could dilute our existing
stockholders' ownership.
In addition, potential acquisition candidates targeted by us may not have
audited financial statements, detailed financial information or any degree of
internal controls. There can be no assurance that an audit subsequent to any
successful completion of an acquisition will not reveal matters of significance,
including issues regarding revenues, expenses, liabilities, contingent or
otherwise, technology, products, services or intellectual property. There can be
no assurance that we would be successful in overcoming these or any other
significant risks encountered and the failure to do so could have a material
adverse effect upon our business, operating results and financial condition.
WE MUST ATTRACT AND RETAIN QUALIFIED TECHNICAL AND SALES PERSONNEL.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical, sales and other personnel.
Because our future success is dependent on our ability to continue to enhance
and introduce new products, we are particularly dependent on our ability to
identify, attract, motivate and retain qualified engineers with the requisite
education, backgrounds and industry experience. Competition for qualified
engineers, particularly in Northern California and the San Francisco Bay Area,
is intense. The loss of the services of a significant number of our engineers or
sales people could be disruptive to our development efforts or business
relationships and could seriously harm our business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". We are
exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates. Much of our revenue and capital spending is
transacted in U.S. dollars. However, since the formation of Advent Australia,
whose revenues and capital spending are transacted in Australian dollars, we
have greater exposure to foreign currency fluctuations. Results of operations
from Advent Australia are not material to our operating results, therefore, we
believe that foreign currency exchange rates should not materially adversely
affect our overall financial position, results of operations or cash flows. We
believe that the fair value of our investment portfolio or related income would
not be significantly impacted by increases or decreases in interest rates due
mainly to the short-term nature of our investment portfolio. However, a sharp
increase in interest rates could have a material adverse affect on the fair
value of our investment portfolio. Conversely, sharp declines in interest rates
could seriously harm interest earnings of our investment portfolio.
<TABLE>
<CAPTION>
Estimated Fair Value
at September 30,
2000 2001 2002 2003 2004 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Instruments 7,750,000 14,500,000 3,000,000 25,250,000
Weighted Average Interest Rate 6.08 6.81 7.20 6.58
Commercial Paper & Short-term
obligations 33,360,000 8,000,000 41,360,000
Weighted Average Interest Rate 6.05 6.73 6.18
Corporate Notes & Bonds 3,584,000 3,584,000
Weighted Average Interest Rate 5.39 5.39
Municipal Notes & Bonds 43,400,000 5,965,000 9,725,000 59,090,000
Weighted Average Interest Rate 6.38 6.46 5.70 5.71
-------------------------------------------------------------------------------------------
Total Portfolio, excluding equity
securities $ 88,094,000 $ 28,465,000 $ 12,725,000 $ - $ - $ - $ 129,284,000
</TABLE>
At September 30, 2000, cash, cash equivalents and short-term marketable
securities totaled approximately $139.1 million, which is comprised of the
$129.3 million in our investment portfolio presented above and $9.8 million in
other cash and cash equivalents.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in litigation incidental to the conduct
of our business. We are not party to any lawsuit or proceeding that, in our
opinion, is likely to seriously harm our business.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVENT SOFTWARE, INC.
Dated: November 9 , 2000 By: /s/ IRV H. LICHTENWALD
-------------------------
Irv H. Lichtenwald
Senior Vice President of Finance,
Chief Financial Officer
and Secretary
(Principal Financial Officer)
Dated: November 9, 2000 By: /s/ PATRICIA VOLL
--------------------------
Patricia Voll
Vice President of Finance
(Principal Accounting Officer)
17
